The Washington Times - July 15, 2010, 10:09AM

Guest post by Horace Cooper

Although a great deal of attention has been focused on the pros and cons of “the Restoring American Financial Stability Act of 2010” overall, little to no attention is being played to specific provisions within the bill which dictate onerous new racial mandates that will be imposed on financial institutions nationwide.   Recall that the financial services bill purports to put limits and regulations in place to prevent another financial meltdown from occurring.  However these so called affirmative action provisions are ill suited to that task and moreover they are likely to fail to meet constitutional muster.

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Based on the faulty premise that somehow having more women and minority bankers will result in banks issuing more loans to women and minorities the racial quotas provision doesn’t in anyway address risk or efficacy of loans being issued.  Yet risk is the number one issue that any reform should be assessing.  And even with the dubious association between workforce representation and lending, it is especially troublesome that Congress may be using an unconstitutional means — race based preferences — to achieve its objectives. 

The so called affirmative action provision is found in Section 342 of the bill.  It creates the Offices of Minority and Women Inclusion in at least 20 federal financial services agencies. These offices will be tasked with implementing “standards and procedures to ensure, to the maximum extent possible, the fair inclusion and utilization of minorities, women, and minority-owned  “financial institutions, investment banking firms, mortgage banking firms, asset management firms, brokers, dealers, financial services entities, underwriters, accountants, investment consultants and providers of legal services.”

Make no mistake this section is quite comprehensive covering  “financial institutions, investment banking firms, mortgage banking firms, asset management firms, brokers, dealers, financial services entities, underwriters, accountants, investment consultants and providers of legal services.”

Additionally the bill includes language outside of Section 342 which imposes affirmative action on the regulatory side of banking such that any “liquidation plan shall take into account actions to avoid or mitigate potential adverse effects on low-income, minority or underserved communities affected by the failure of the covered financial company.”   The bill specifies that the Financial Stability Oversight Council headed by the Secretary of the Treasury specifically examine any financial institution’s “importance as a source of credit for low-income, minority or underserved communities” before any takeover is initiated.

Combined these provisions will likely force banks and other lending institutions to place far greater emphasis on the race and gender of their employees and customers than on the riskiness of their loan portfolios. 

Ironically this is the same type of effort that was ultimately found to be unconstitutional when the Feds tried it with the broadcasting industry. 

Throughout the 1970s Congress and the FCC pressed the broadcast industry to ensure that radio stations increased the number of minority employees based on the belief that such hiring would lead to greater programming diversity.  Like section 342, the FCC assessed broadcasters licenses on their efforts to implement an EEO program targeted to minorities and women.  In 1998, in a landmark ruling  Lutheran Church v. FCC, the DC Court of Appeals struck down these hiring rules calling them “racial proportionality” and “proportional representation” barred by the Constitution. 

This ruling has broad implications for any federal effort to use raced based hiring as a means of achieving any particular policy outcome.  Any attempt by Washington to create a nexus between racial hiring and a policy outcome will likely run afoul of the Constitution.  Moreover, particularly in this context, shifting emphasis away from systemic risks and safety and soundness will give us exactly the same kind of financial meltdown that we are presently overcoming.

 

Horace Cooper is the Director of the Center for Law and Regulation with the Institute for Liberty